TaxProfessionals.com
Posted by James Financial Services Inc

What to Know About Flexible Spending Accounts

What to Know About Flexible Spending Accounts

Two things stand out about flexible savings accounts (FSAs). 

  1. They can help reduce your taxes. 

  2. They help you pay for medical or dental bills that are not covered by health insurance.

What's there not to love about them? Oh, one more thing. An employer only offers FSAs. If you're self-employed, this is not for you, sorry.

Before we go into the details, let's summarize the deal. Your flexible spending account contribution is a deduction made by your employer, approved by you. Your taxes are thereafter computed based on the residue of your income after the FSA deduction. 

That means you pay fewer taxes. However, the FSA contributions can ONLY be used to offset specific medical bills, so it is not an all-purpose fund. If you're lucky and have no medical bills for that year, you also do not get to recoup it. Well, we'll get into the details of that soon. But first, let's look at the significant facts about flexible spending accounts.


  1. Employers only offer FSAs.

Employers can only offer flexible Spending Accounts. Although no employer is bound to offer it, no self-employed individual can operate one. The employer may also contribute to the account as an incentive. As a prospective employee, you may need to enquire from your employer if FSAs are operated in the company or not. Enrollment for an FSA is done during the enrollment period, which takes place once a year. Once you enroll and decide on the amount you want to contribute, your employer takes it out of your paycheck before your taxes are computed. The funds then go into your FSA.


  1. Flexible Spending Accounts deducts funds from earnings before taxes.

The significant advantage of the FSA is that the deductions are made before taxes. That means you save some money that could have gone into taxes and use them for offsetting medical bills. If your taxes are 25% of your income, and $800 goes into your FSA, you have saved $200 in payroll taxes. This is a smart way of paying for specific medical bills. FSAs also help reduce the overall taxes of the company as well.


  1. Funds from FSAs are only used for qualified medical and dental expenses

FSA funds are strictly used to offset specific medical bills, including diagnosis, cure, and prevention. FSA funds also cover certain prescription drugs and medical equipment like crutches and bandages. Menstrual health products also qualify for reimbursement. However, medical procedures like cosmetic surgeries are not covered.


  1. There's a limit to how much you can contribute to your FSA.

The FSA is not a typical savings account because it is purpose-built. Therefore, there's a limit to how much you can contribute. Remember, since your income would only be taxed after the deduction, it is only expected that there would be a cap to how much you can contribute per year. For this year, the cap is set for $2,850 annually. That means you may not contribute more than that amount to your FSA. Last year, the limit was $2,750. As a couple, your partner can also contribute up to the maximum amount.


  1. FSA funds are only valid for a year

Use it or lose it. FSA funds are valid for only a year. Any unused funds are returned to the employer. However, since 2021, there have been amendments to the rule. Employees can rollover the unused funds into the New Year in certain instances. This is, however, dependent on the employer.


  1. Rollover plans

Typically, you should use up your FSA funds in a year. However, there's a grace period of an extra two and a half months. However, since the coronavirus pandemic, amendments have allowed all unused funds to roll over automatically into the New Year. Before then, only a maximum of $550 of unused funds could be rolled over. However, this is also dependent on the employer.


Please check with your employer for further details on how best to benefit from the flexible spending accounts.


FOR MORE INFORMATION ON HOW JAMES FINANCIAL SERVICES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

James Financial Services Inc
Contact Member